Friday, July 16, 2010

"Economists React: How Big a Threat Is Deflation?"

Fromn the WSJ's Real Time Economics:

Economists and others weigh in on the June consumer-price report on inflation.
–Headline CPI continued to trend lower, with base effects accounting for a large part of the decline, the last three months have seen an annualized fall of both 26% in energy prices and 0.6% decline in housing costs. We remain concerned that the continued weakness in the consumer sector will see prices trend lower through the second half. The persistent inability of the recovery to gather any momentum frustrates the consumer and keeps demand and ultimately inflation on the back foot. –David Semmens, Standard Chartered Bank

– Core prices [excluding food and energy] rose a bit more than expected, increasing 0.2%, the first such gain since October 2009. The jump was largely due to a jump in apparel prices which rose 0.8% which contributed the largest portion of the gain in core prices. Medical care rose 0.3%, the first gain in this category of 0.3% since March while tobacco prices rose a full 0.1%. The specifics aside, one month does not a trend make and the overall bias is for lower prices going forward, especially so given further moderation in economic activity. Should employment pick up in an unexpected fashion though, this concern would fall by the wayside. –Dan Greenhaus, Miller Tabak

–The June report clearly suggests some firming in price trends, at least for the near-term. Importantly, much of the improvement has come from components that are highly persistent, such as owners’ equivalent rent (OER) and used vehicles. We therefore think this strength will persist for a few more months. Besides these series, strength was seen in prices for apparel, medical care, and hotel rooms. These gains were partly offset by weakness in public transportation and communication. –Zach Pandl, Nomura Global Economics..MORE